We have a general idea
that status and prestige can do things – good things – to a person or
organization. We are all familiar with how the prestigious classes of wine
demand higher prices, even for a given quality level; there is evidence on this
in research on French and California wines. Status effects are also well known
from many other contexts, and a more-consequential example is financial
markets, in which the most prestigious banks gain price and distribution
advantages over all others.
A new paper by Anne Bowers and Matteo Prato in Administrative Science Quarterly gives interesting
new details on the effects of status. They
look at equity analysts, who seek to help investors in the stock market by issuing
reports on firms and estimating their future earnings. This is difficult work,
both in getting the estimates right and in gaining the confidence of investors,
but some analysts are so highly regarded that their estimates can move the
price of stock they report on. They have market power even though they just act
as observers and forecasters. But how can an investor determine what analyst to
pay attention to?
Conveniently, there is
the magazine Institutional Investor, which caters to the large (and very
powerful) institutional investors such as mutual funds and pension funds, as
well as ordinary investors. The magazine has an annual All-Star award, given
mostly for accurate estimates but also for other qualities such as high service
to customers (again, institutional investors). This award is prestigious, but
it is also a sign of quality. If the market could consider the quality and
prestige aspects of the award separately, someone who was nearly good enough
for the award should gain nearly as much power as someone actually getting it.
You are probably guessing that this is not what happens. And you are right.
Bowers and Prato had a
very clever way of finding this out. The award is given across many categories
of equities, and these categories often change through addition, deletion,
combination, and splitting. This is neat
because it means that an analyst could become an All-Star, or lose an All-Star
award designation from a prior year, simply because the categories changed.
Focusing only on these changes in awards, they found that the difference
between having an award and not having one was a great deal of market power.
Gaining an award meant that an analyst moved stock prices much more; losing one
meant that an analyst moved prices much less.
